Cuker v. Mikalauskas

PECO is a publicly regulated Pennsylvania utility. A group of minority shareholders demanded that PECO authorize litigation against some of its directors and officers, based on allegations that they had damaged PECO by mismanaging the collection of overdue accounts. Another group of minority shareholders (plaintiffs) filed a complaint against PECO directors and officers, which made the same allegations of wrongdoing. PECO’s board created a special litigation committee to investigate the allegations raised in the demand for litigation and the complaint. Only members of the PECO board who were not named in the demand for litigation or in the complaint acted in creating the special committee, which consisted of three outside directors not employed by PECO. The special committee concluded that there was no evidence of bad faith, self-dealing, concealment, or breach of the duty of loyalty by the directors and officers, and that they exercised sound business judgment and acted in the company’s best interests. The nondefendant members of the PECO board voted to reject the demand for litigation and terminate the action started by the complaint. The lower court denied PECO’s motion for summary judgment, finding that Pennsylvania has not adopted the business judgment rule and that, under Pennsylvania public policy, a corporation lacks the power to terminate a pending derivative suit. PECO appealed.